The blog based on the book by Professor Daniel Diermeier

Political Versus Corporate Crises

Can political instinct be helpful when managing corporate crises? Not always–and here’s why.

Nowhere is effective communication as important as it is in politics. It is therefore not surprising many corporate crisis management and communications experts have earned their credentials in the contact sport of politics, whether in electoral campaigns and as spokespersons for the executive branch or agencies. Naturally, they will apply their political instincts and frameworks to the corporate world. Yet, a simple knowledge transfer can be perilous, especially in a crisis.

Among the many differences, two stand out. First, there is an important difference between the dynamics of attention in a corporate crisis and those in a political crisis. A common tactic for surviving a political crisis is to “wait it out”. In other words, media attention will soon move to a different topic, and by Election Day, voters may have long forgotten about this particular incident. The 2004 Abu Ghraib scandal, for example, played no role in the subsequent U.S. presidential campaign, and was never mentioned during the candidate debates between President Bush and Democratic challenger John Kerry.

“Waiting things out” works in politics for many reasons: Voters only cast ballots every few years, they have fewer choices on the ballot and, most importantly, voting decisions are driven by numerous considerations, including expectations about future policies and conduct. In this choice process, even a significant crisis is only one factor among many, and is perhaps only dimly remembered by voters when they cast their vote. More important, the “wait it out” approach works so well because the public pays constant attention to politicians, especially during a campaign. Since one story quickly follows another, any particular story is less likely to take firm root in the public’s imagination.

This approach does not work equally well in the corporate context because customers rarely pay a consistent, high level of attention to a company’s actions. When they do, however, they do so with heightened focus, so the impact on the company’s reputation can be profound and permanent. Imagine the Abu Ghraib scandal occurring in a prison operated by a private contractor. It is highly unlikely that the CEO would have survived such an incident.

Second, the fundamental experience of political competition is partisanship: government versus opposition, left versus right, Republicans versus Democrats. This experience is most pronounced during a campaign when for weeks and months, the gain of one side is the loss of the other. Thus, any damage to one’s preferred candidate’s public standing is immediately interpreted as the consequence of a negative campaign tactic employed by the other side. Of course, these fears are well-founded as evidenced by the history (and success) of negative campaigning. But the same dynamic is rarely at work in a corporate crisis.

Consider a familiar problem, say a recall of unsafe toys due to lead contamination used by a supplier. In this case, the toy manufacturer can expect hostile media coverage quickly followed by public concern from safety advocates, regulatory and legal action, and congressional oversight hearings. It is natural to feel attacked on all fronts, especially if the company feels it bears little responsibility for the incident. But notice the key difference when you compare this crisis to one during a political campaign: There is no “other side” on the issue. Toy safety is a universally held standard; it is not contested as the work of different political platforms during a campaign. Rather, the issue is whether the company fell short of the standard and, more generally, how toy safety can be improved—an outcome where the general public and, in most cases, the industry benefits. Using the language of game-theory, while political campaigns are zero-sum games, quality issues in an industry rarely are. While the exact trade-offs and welfare implications are complex, they typically are best understood as non-zero sum games.

A particularly tempting type of reputational challenge is an activist campaign, such as when aggressive NGOs such as the Rainforest Action Network or Greenpeace target a company for its alleged irresponsible environmental practices. Senior managers and boards frequently feel singled- out unfairly or misunderstood (and yes, this is usually the case). But even in the most confrontational of reputational challenges—an activist campaign—non-zero sum gains can be found.

One surprising instance is an analysis by my colleague Tim Feddersen and Tom Gilligan, Dean of the McCombs School of Business at the University of Texas, Austin. They argue that in industries with “credence goods,” activists can perform an important function as an information intermediary. Credence goods, by the way, are characterized by the attributes customers care about, but that cannot be experienced in the act of consumption. Dolphin-safe tuna, fair-trade, child labor and environmental standards all fall into this category.
These attributes may lead customers to switch to competitor products, but they cannot verify such allegations on their own. Customers need some assurance that buying the product is OK and companies are not always credible sources of such information. Why not? Because providing the standard preferred by concerned customers is typically more expensive. So, profit-maximizing firms have an incentive to conceal the facts of how the product is provided. Even if they tell the truth, they may not be believed. This “profit paradox” creates the need for trusted intermediaries that can be filled by the media and even activists. Feddersen and Gilligan show that the presence of such activist intermediaries can be welfare enhancing.

In a current project with my Kellogg colleague David Besanko and Northwestern economics graduate student Jose Abito we show a different mechanism where activists can create welfare improvements. The idea of the model is to show that companies that have an incentive to invest in their reputation for corporate citizenship will eventually have an incentive to “coast”, i.e. invest less and less as their reputation for social responsibility grows. I will discuss these ideas in a future posting. Stay tuned!